Friday, March 19, 2010

What good is GST with a spendthrift govt?

“Sell 10,000 APs and raise RM2.4 billion next year. So you've got more than what you're proposing,” said DAP's Klang MP Charles Santiago as a challenge to the government's plan to introduce the Goods and Services Tax (GST) next year. According to Santiago, the government has the resources available such as the AP system to better the RM1 billion expected to be raised through GST. As such, there is really no need to implement the GST for that purpose.

The GST implementation was mooted by the International Monetary Fund as a means to counter the rising budget deficits. The odd thing is that the government severely criticised IMF intervention during the 1998 financial crisis, but chose to go along with their suggestion to implement the GST.

“In the last 12 years, the government has been spending like there's no tomorrow. We have been spending more than we are earning.

“The deficit is getting bigger, but our oil reserves are depleting. The IMF has been telling the Malaysian government, 'Hey, you're spending more than you are earning, stop it',” said Santiago.

Not in the interest of the public

The government's charge that prices will drop because of lowered taxes does not resonate with the opposition MP, who said that prices in the country are not controlled by supply and demand (market forces) but concessionaires who exercise pricing strategies knowing that they have exclusitivity over certain commodities.

“A lot of the prices are controlled by concessional markets. It's very clear that having concessionaires will drive up the price of goods and services (even after the GST is implemented),” he added.

And what of the government's role in recent times?

The Klang MP argued that the government's role “was no longer as a provider but an arbitrator, a middleman” which gave out regulatory powers to bodies that did not serve the interest of the public.

Because regulatory powers moved further away from the government, commerical or private parties with strong interests in a certain regulatory provision could lobby the said body to change the rules to their benefit.This is known as regulatory capture, and the public loses out because its interests are not taken care of.

Macro matters

“We really need to go back and look at implementing a Keynesian state,” said Santiago.

The MP reiterated the need for a tax mechanism where vulnerable communities will be protected, more so in Malaysia where the disparity between rich and poor is widening.

As Malaysia's 'Gini' index moves towards 1 (increasing inequality of wealth distribution), Santiago said that there is a need for a tax system that is not punitive but enabling.

He said that the implementation of the GST may bring about lower tax rates, but because more things will be taxed, the burden on lower-income families will be greater.

Families will have to work harder and for longer hours to meet the higher costs, therefore undermining the integrity of the family structure, which has ramifications for Malaysian society as a whole.

The GST in itself is neither good nor bad, but implementing the GST needs to be done to rectify or better the current situation.

“This whole GST thing raises a variety of questions. For one it's just not about a crisis of public finances but also about the way we manage public finances.

“If you raise RM1 billion but these issues are not taken care of, the RM1 billion will disappear too,” said Santiago.Seeking more feedback

The GST was first mooted in 2006 and was expected to be implemented the following year. However, the government deferred the date saying that public feedback suggested it needed more time to refine the proposed model.

Last December, the Bill was once again tabled for first reading in the Dewan Rakyat.

The second tabling was scheduled for this month, but was postponed at the las minute for similar reasons.

The government insisted, however, that this is not a policy cancellation and that the GST will be implemented in the near future.

The GST is a multi-stage consumption tax that is imposed on the sale of goods and services. It's not a new tax but a tax reform that will replace the current services and sales tax (SST), as well as the earnings-based tax.

Implementation of the GST will begin with a rate of 4 percent which is among the lowest in the world. This rate is expected to yield the government RM1 billion in revenue annually after the first year.

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About Me

Mohd Kamal Abdullah frequently writes in Malaysiakini, MalaysiaToday and in the FORUM column of MALAYSIA CHAT www.malaysia-chat.com. Kamal holds a law degree and was active in Malaysian Politics (a component party of Barisan Nasional) until of late, to concentrate on pursuing a post-graduate law degree in United Kingdom.